Am I being charged Interest on Interest with my Mortgage

RetroDave99

Hi, I hope someone out there can help!

I've just had a annual Mortgage statement through and have some questions as to what is the correct way for a bank to calculate the mortgage interest each month..

The main reason is that my bank seems to be calculating interest on interest each month... This is for a Fixed Rate, Interest Only Mortgage ....let me explain by example

1. Mortgage Balance is £100,000 on July 1st
2. Bank Calculates Monthly Mortgage Interest on July31st at £400.
3. Bank adds the £400 to the Balance on July31st
4. Bank takes DD for July's interest on August 28th.
5. Bank Calculates August Interest on August 31st Balance = (28 Days at £100,400 and 3 Days at £100,000 (it got paid off by DD remember)
6. Bank calculates that to be £402 and adds it to the Balance.
7. Next time round it then calculates interest on £100,402..etc, etc

I hope that makes sense, but I noticed this as each month (with the same number of days) the Interest calculated is creeping up everytime, as interest is calculated on the interest waiting to be paid off.

I can't believe this can be correct and would be interested in hearing from any financial savvy people out there.

Thanks
Dave

HappyMJ

It is correct.

ValHaller

No payment of £400 to the account around the 28th July. This missing payment increases the interest in august above the payment made in august, so the amount outstanding must increase.

RetroDave99

Hi, Thanks for the replies - the Bank doesn't take the DD for the interest charged for at least 28 Days, so the balance nearly always (apart from a couple of days each month) includes the interest amount, upon which they are calculating the next months interest.

I managed to speak to someone at the bank that new what I was talking about and they agreed that the interest calculation shouldn't be including the previous months interest amount. It has been sent to an offline team to check the figures - will keep this thread updated.

Thanks
Dave

getmore4less

Looks normal to me

Most mortgages compound monthly.

If you don't coordinate the payment with the compounding day then for daily interest calculations you will get this.

Where the monthly payment goes out on the same day the interest is credited you don't notice/get any issues.

Change the pay date to the 1st.
( or the day the interest is added)

RetroDave99

@getmore4less - thanks and yes I think that will solve it. I'll get the DD changed now!

Dave.

getmore4less

Another way to look at it is the payment on the 28th iis to cover that months interest a day or 2 in advance.

That way the £100k becomes £99600 for a couple of days then the interest gets added bringing it back to £100k(ish).